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Bad Debt Trips Tenet

Shares fall after the latest loss at the big hospital chain.



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can't stop the pain.

While the ailing hospital chain is bleeding far less than it once did, the company - hit by declining admissions and rising bad debts from the uninsured - continues to fall short of even dismal expectations. Setbacks at USC University Hospital, which is fighting to leave the Tenet umbrella, and ongoing challenges in the company's key Florida market continue to cause serious pain.

To be fair, Tenet's second-quarter loss of $30 million pales in comparison to the staggering $398 million loss suffered a year ago, when huge government fines hammered the company's results. Still, Tenet posted an operating loss of 6 cents a share that was a full nickel worse than analyst estimates. Meanwhile, the company finally lowered its aggressive full-year targets for the full year.

Throughout 2007, Tenet now expects to generate just $675 to $725 million in earnings before interest, taxes, depreciation and amortization. Until now, the company had repeatedly promised to deliver full-year EBITDA of $700 million to $800 million instead.

Even if Tenet hits the midpoint of its newly lowered range, experts wonder how the debt-laden hospital company can satisfy its hefty interest payments and still keep up its generous capital expenditure program - funding improvements needed to boost admissions - going forward.

"It's highly unlikely that Tenet can continue forward with the cap-ex program that the company discussed at its investor day" earlier this summer, says Peter Young, a business consultant at HealthCare Strategic Issues. "When you look at all of the operating indicators - the core things that make up the hospital business - they're moving in the wrong direction."

Ultimately, Young adds, "I think it's going to be challenging for Tenet to continue to attempt the turnaround as management has outlined it."

But for now, at least, Tenet is sticking to its plans. Indeed, despite the never-ending setbacks, Tenet CEO Trevor Fetter on Tuesday said, "We remain confident that we are implementing strategies that have the potential to drive improved financial performance over the longer term."

By now, however, Tenet investors have clearly lost their patience. After waiting on an elusive turnaround for nearly five years, they have sent the company's stock to its lowest levels in decades.

Tenet shares tumbled another 5.1% to $4.69 following the company's latest miserable update. The stock, once a $50 highflier, now qualifies as a "penny stock" - fetching less than $5 a share - that cannot be purchased by some big-name funds.

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Perhaps even more worrisome, Tenet's bonds have been losing ground as well. Bonds rank as a relatively safe investment unless a company faces a liquidity crisis and possible bankruptcy, a fate that Tenet has so far managed to escape.

"The bond market is a place for stability," Young notes. "Bonds usually fluctuate by only 1%, 2%, 3%.

"But in the case of Tenet, we have seen a near-collapse in the bonds, which are off some 20%" so far this summer, he adds. "That is a big problem. Credit investors have to be worried."

With its latest quarterly update, Tenet probably caused a few more hearts to race.

As Young points out, the company reported deterioration in almost every key metric. While net operating revenue did rise 1.5% to $2.23 billion, thanks to price increases, it still fell a bit shy of the consensus estimate. Meanwhile, other crucial operating metrics looked far worse.

Patient volumes slid 2.2%, with hospitals in Florida - Tenet's second-largest market - causing more than half of that downturn. Normally lucrative cases, including both inpatient and outpatient surgeries, suffered even steeper declines.

Indeed, only admissions from uninsured patients - who rarely pay their bills - climbed higher in the quarter. As a result, the company's bad-debt expense rocketed to 18% during the period. All told, uncompensated care accounted for some 12.7% of the company's net operating revenue last quarter.

In typical fashion, however, Tenet itself found some reason for hope. The company focused on lucrative managed care admissions, which showed some signs of stabilization, and hospital results outside of Florida in particular.

"Our volume softness continued to be concentrated in the Florida market, where admissions declined by roughly 1,600 - or more than half our total admissions decline in the quarter," operating chief Stephen Newman stressed on Tuesday. "An additional 18% of the admissions decline was generated at USC University Hospital and our two Dallas hospitals where our leases will expire on Aug. 31.

"Aside from these trouble spots," Newman added optimistically, "we continue to hold our own in the aggregate by maintaining or growing market share despite the weak volume environment that currently characterizes much of the healthcare provider industry."

Young, for one, feels that Tenet should be focusing squarely on the company's trouble spots instead.

"It's pretty clear that some of the Florida hospitals may need to be sold," Young says. "Others may need serious service-line reconfiguration.

"I'm sure that Tenet is considering all of these options right now."